3.7 The development of world trading patterns
The theories reviewed in Part A emphasise differences between countries with respect to climate, factor endowments and innovative capabilities. We might then reasonably infer that trade will tend to occur between dissimilar countries. However, the range of trade problems between countries which we read about constantly seems to be at variance with theories which emphasise country differences.
Activity 3.3
Can you recall what is meant by factor endowments? If so, write the definition here. If you are unsure, do one of the following:
- Re-read page 166 of Hill (2005).
- Consult the glossary that can be found in the back of your textbook from page 695. The glossary is a useful resource that highlights key terms and is ideal for testing yourself.
The fact that so much trade occurs among industrial countries is due to the growing importance of product-technology - an acquired advantage as opposed to a natural advantage in world trade. There is in fact a country similarity theory which holds that, having developed a new product in response to conditions in the home market, a producer will then look at markets perceived to be similar to the home market. In other words, consumers in industrial countries will have a high propensity to buy high quality and luxury products, whereas consumers in lower-income countries will buy few of these products.
Cultural similarity also helps to explain the direction of trade. To some extent this is because business people find it easier to do business in countries similar to their own: that is, between countries that have a low psychic distance in that they share a common language and similar culture and understandings (Wall and Rees 2004). Another factor to consider is that colonial links tend to be maintained by businesses long after the colonial regime has handed over authority to the local regime.
We should also be aware of the impact of 'trade ecology' in the development of world trading patterns. This concept suggests that all countries are to some extent interdependent. No country is completely dependent or independent, although some are closer to one extreme or the other. Let's look at the three possibilities:
- Dependence. A country which has too much dependence on, say, a single commodity such as tin or coffee is vulnerable to changes in the world prices of these commodities. Similarly, a country which is highly dependent on one market - for example, the case of Mexico and the US - can be seriously affected by policy changes in the market.
- Independence . T oo much economic independence means doing without certain goods, services and technology. Albania , under a communist government after World War II until 1985, was almost completely isolated from the rest of Europe . The price of independence was having to do without the many products Albania could not produce for itself. India , too, after independence from Britain in 1946, pursued a policy of internal development. The result was low annual growth rates, largely because India 's go-it-alone policy denied the country use of the best technology.
- Interdependence. V ulnerability to changes in other markets may be limited through the development of trade relationships on the basis of mutual needs. France and Germany have highly interdependent economies. Each needs the other about equally as a trading partner and so neither is likely to deny supplies or markets because the other could retaliate.
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